As readers will recall, yesterday we highlighted the HFT-driven flash crash in Core Molding (CMT) after an algo very obviously went insane and took the stock price to $0.0001 in the span of one second. Today, courtesy of our friends at Nanex, we get a transposition of the events at 14:19 in all their visual glory, together with a succinct explanation of everything that went wrong.

Jeffrey Donovan from Nanex writes in:

Here's the jist of it:

That chart was run on my Price Sequencer. You can see, approx 14:19:07 bats start stubbing the bid..... a second later NSDQ follows it down to 0.01 and takes the NBBO along with it! Once down there the NSDQ algo goes into repeater mode, cycling the bid/ask sizes as you can see.

I also took out everything except NSDQ, PACF and BATS and plotted them as dots to see just where it all occurred:

and then again as lines:

That last one I took the lower scale to -1.0 just for a slightly better visual.

So that's it. Stub quoting takes the NBBO to zero and where the NBBO goes.......

So there you go: no NYSE Liquidity Replenishment Points to blame here, but a pure and simple example of an algorithm going haywire. We wish to thank BATS exchange (which is no longer content with busting the NBBOs in the US, it has now also decided to go after Chi-X in Europe) for allowing this vivid demonstration of a mini flash crash in action, in which there is absolutely no fat finger, no Greek parliament to blame the crash on, and is merely a function of a busted HFT algo which ends up making a mockery of the price discovery process. Our market continues to be extremely fragmented, poised for an increasing number of micro flash crashes either in one name, or multiple, and with the SEC continuing to dither and take no action to remedy the broken topology and microstructure of the market, we can be certain that we will see many more such examples in the future. Only this time everyone will know that just like in this isolated case, it will be the HFTs which have completely destroyed the credibility of an efficient market.

Great post. No surprises here. We are seeing the intentional injection of noise, independent of any stock valuation, with the added risk that the bidder has no intention of honoring the bids it is making.

This is not a market. This is a broken slot machine that never makes payouts.

That's exactly right and that is the ROOT problem with Keynesian Wonderland. The assumption is that the physical world is as infinite as mathematics because theoretically we can run deficits up to infinity and it would take infinity years to ever reach infinity.

People will stop playing the game; the retail crowd, which we know is the ultimate dumping ground for the garbage once they are done manipulating it, will simply leave the stadium altogether, leaving the algos to scalp each other.

auldin's book, admittedly some time back, claimed hedge funds would be important as the amateurs couldn't deal with the whackiness. No way. They will leave the game.

I hear your sarcasm. However, you're missing the point: This stock was selected for annihilation, and it was annihilated. Other stocks are arbitrarily and periodically selected as well (this is not anomalous). This means that at any given time, any given stock can be selected for termination (dramatic manipulation). And, these are not "victimless" crimes -- share holders and other market participants suffer material losses (in direct zero-sum proportion to HFT profits).

This is not a market. It performs none of the functions of a market. It performs all the functions of fraud (I induce you to give me a thing of value based on my misrepresentation of material information, in this case, the current [intentionally manipulated] share price). Historically, this was as illegal as you could get.

Further, this doesn't merely apply to stocks: This applies to any funds and any index (this activity is now common across the market, with greater visibility on low volume days).

You are asserting that this is a "data point of one", and that it is a "small absolute value data point". In contrast, I assert it is representative of current market behavior(it is not a data point, but rather, a case study representative of a pattern and a trend), that implies great impact(you can get massively screwed), and against which there is no protection(there is nothing you can do about it except to exit the market).

Would you like to assert the market is serving its function (as an impartial exchange based on market price)? Would you similarly like to stay with your assertion that this is not a big deal?

Yes, the market is exactly that 'a market'. No one is forcing anyone to buy sell or anything else. If you want to make an offer or a bid you can, for virtually zero friction. In my schwab account the price is $9 to trade as much as I want. In my professional world I pay 20 mills plus or minus rebate.

If you think the price of a stock is grossly misrepresented by the current quotes then by all means go in there and hit a bid or lift an offer.

Yes I would certainly assert that the market is serving its function as an impartial exchange. Barrier to entry to trade, and general friction, is lower than it has ever been in the history of markets. Apparently people here are of the belief that the market owes them non chaotic behavior and that others trading in the arena should somehow make allowances for their lack of insight by making deep liquid markets with tight spreads and not charging any fees for the risks. Good luck with that.

You have just argued against any role by any regulatory agency, the entire purpose of the SEC, the requirement that shareholder' reports are truthful, and all laws that corporate representatives are expected to tell the truth when representing the corporation to the public.

Ok, fine. Lying and misrepresenting is fine. Like all other sane people, retail investors will depart and leave behind a much smaller den of thieves that all know they are deceiving each other at all times.

You seem to think that's a market under the assertion that a "price" will somehow be established among parties for any given transaction. No, that's caveat emptor in the absence of any social expectation of performance (adherence to contract).

You are arguing against that which is well understood: When information is fundamentally dis-proportional, markets break down.Transactions no longer occur (because nobody trusts representation by the other side.) This is the death of the market. In that case, the only things left behind are thieves and suckers.

Years ago we knew of an elderly cleric who, in her far distant past (before television), had repeated, vivid dreams of the end of the world being ushered in by a "black box of somesort". She was not a whack-job, just a regular person having strange dreams.

Years later discussing this, we assumed it was television, and laughed.

Dreams are universal language. So a black box of somesort is a blackbox of somesort.

Box To see a box in your dream, signifies your instinctual nature and destructive impulses. Alternatively, you may be trying to preserve and protect some aspect of yourself. The box may also symbolize your limitations and restrictions. Consider the pun of "being boxed in".

To dream that you are opening a box, indicates an aspect of yourself that was once hidden is now being revealed. It symbolizes self discovery. Consider your feelings as you open the box. If opening the box fills you will fear, you may be uncovering aspects of yourself that cause you to feel anxious.

So a more likely explanation is harsh bitter limitations of freedom by the powers that be causes a destructive impulse. Makes me poetic. There once was a god named yawhew. Who told a 100 billion beings no way. They had hissy fit and burned the school to a pile of shit. End.

If you are looking for the "black box" and find the sub-conscious mind... it might do.

Perhaps the algorythms of automation and computer-driven decision systems, such as HiFreqencyTrading etc, are the juvenile manifestation of command-control insanities that are not ready for polite conversation...as in the unfit-to-print category.

Has anyone ever claimed that fraud pertains only to money? Or has limits?

It happens everyday, check out letter Q today at 10:48, $5.62 all the way down to $5.24 all in the space of 30 seconds.

Predatory algo, cleaning up the GTC stops by whats left of smaller retail traders, just smaller "flash crashes" that are profitable for those who make them, and not big enough to get on the news, so no one ever hears about it.

The programmer sure screwed up that algo. He must of taken the proposal "shave $0.0001 off the price" to "take to $0.0001 price". That is why you draw up the propsal in the programmers language (carbon launguage, not binary).

There is nothing here to suggest that this mayhem was caused by a HFT. The frequent changes to the Nasdaq bid sizes at the lows was a function of orders coming in and being matched against the bids. It was not the changing size of bids that caused the trades, but the trades that caused the size of the bids.

Someone kept posting more shares bid, those shares kept being executed against reducing the number of shares bid. Wash rinse repeat. That the bid was at less than $0.01 for a stock having traded already well past its average daily volume (of around 5K/day) is not terribly suprising (who here would be a market maker and continue to post bids on a low volume company after seeing the entire bid side of the order book wiped clean???).

As for why something crazy went ahead and sold all of the shares at those low bids, that is clearly an error somewhere, but there is absolutely nothing here that points to it being a HFT that was doing the selling. More likely, it was a human error where either a different size, price, ticker or market was intended.

The error could have been in any of a HFT firm, a low frequency firm, a retail or institutional trader using a broker dealer that had an error and kept sending the same market order over and over, a problem with inter-exchange routing, a bug in the Nasdaq matching engine etc. etc. etc...

It is fair to same that something crazy did happen - but it is not possible with this analysis to attribute the error to any entity nor type of entity. Odds are that it was not a HFT, since it isn't worth the compute cycles to trade shares in a company with a daily volume of 5K, and something initiated sales of CMT at 14:19:07.

What Nanex is seeing with the changing sizes is the effect of the trades continuing to reduce ever replenished liquidity (albeit at a very low price point). It is not the cause but rather the effect.

I don't understand the junking of this post. That's also what I figured, that the first thing to look for would be a market order to sell a decent lot size in something that trades an average of less than 6K shares per day.

The entire purpose of a stop loss is negated in such an environment... One would think the computer programmers (remember the bots only do what they are programmed to do) are experiencing dot com era levels of irrational exuberance... As they do the sneaky sneaky unfortunately they are taking down the trust and belief in the markets. At some point it will be "game over" for them as enforcement will be needed for the very survival of the markets -- there will come a tipping point -- soon it appears -- for such "data molestation" to stop. The deeper the game goes the more the Potential rises in the opposite direction. Good luck with that one when it comes... "Nothing fails like success..."